Full List of Management Accounting for Decision Makers_2 ppt

Forexample, managers may need information to help them decide whether to: l develop new products or services as with a computer manufacturer developing anew range of computers; l increas

The SWOT framework is not the only possible approach to undertaking a position lysis, but it seems to be a very popular one.

ana-3 Identify and assess the strategic options

This involves attempting to identify possible courses of action that will enable the business to reach its objectives through using its strengths to exploit opportunities,

at the same time avoiding exposing its weaknesses to threats The strengths, nesses, opportunities and threats are, of course, those identified by the SWOT analysis.Having identified the possible options, each will then be assessed according to agreedcriteria

weak-4 Select strategic options and formulate plans

The business will select what appears to be the best of the courses of action or egies (identified in step 3) available When making a selection, the implications of thechoice for the mission and objectives should be considered as, at times, they mightrequire some adjustment The strategies selected will provide the general way forwardbut a plan will be required to specify the particular actions that must be taken Thisoverall plan will normally be broken down into a series of plans, one for each element

strat-of the business

Sometimes a business may select a strategic option that results in the sale of a part,

or all, of its operations Real World 1.5provides an example of this Here, Citigroup,the business that we met in Real World 1.2, sold a part of its business that it felt lacked

‘strategic fit’

HOW ARE BUSINESSES MANAGED? 9

Opportunities might include:

l new destinations becoming available, particularly in eastern Europe

l increasing acceptance of ‘no-frills’ air travel among business travellers

l the development of new fuel-efficient aircraft

Threats to the business might come from:

l increased competition – either new low-fare competitors entering the market or tional airlines reducing fares to compete

tradi-l fuel price rises

l increasing congestion at airports, making it more difficult to turn aircraft around quickly

l changes in the regulatory environment (for example, changes in EU laws concerning themaximum monthly flying hours for a pilot) making it harder to operate

l vulnerability to a downturn in economic conditions

You may have thought of others

5 Perform, review and control

Here the business implements the plans derived in step 4 The actual outcome will bemonitored and compared with the plans to see whether things are progressing satis-factorily Steps should be taken to exercise control where actual performance does notappear to be matching plans

Figure 1.3 shows the strategic management framework in diagrammatic form Thisframework will be considered further as the book develops We shall see how the business’s mission links, through objectives and long-term plans, to detailed budgets,

in Chapters 6 and 7

Real World 1.6provides an indication of the extent that strategic planning is carriedout in practice

REAL WORLD 1.5

Business is not a hobby for Citigroup

Citigroup is looking to sell its German retail banking operations as part of the radical steps being taken

by Vikram Pandit, chief executive, to shrink his bank’s balance sheet in the wake of the credit crisis The business is one of the most successful consumer banking operations in Germany and ana- lysts said a sale could raise A4–5 billion ($6.2–7.8 billion).

A sale, which would attract interest from domestic rivals as well as international banks keen for

a foothold in the country, would make Citi the first bank to withdraw from an important territory in the aftermath of the global financial crisis.

The German operation is among Citi assets deemed non-core by Mr Pandit, who said this month he intended to cut the bank’s assets by up to $500 billion in an attempt to increase returns.

‘The process has been initiated,’ said a person familiar with the plan.

Citi has been in Germany since 1926 but Mr Pandit has repeatedly said the bank cannot afford

‘hobbies’ – businesses that lack critical mass or a strategic fit with the rest of the conglomerate The sale would be one of the largest disposals to date A bank spokesman in Germany said:

‘We are exploring a variety of options for our retail banking business in Germany No decision has been made.’

Citi also runs Frankfurt-based corporate and investment banking operations, which are not being considered for disposal.

The bank has about 3.25m retail customers in Germany and claims a leading position in the consumer credit market It made net income in 2007 of A365 million.

Source : ‘Citi looks to sell German retail arm’, Financial Times (Wilson, J and Guerrera, F.), © The Financial Times Limited, 17 May 2008.

FT

REAL WORLD 1.6

Strategic planning at the top of the list

A recent survey was carried out of 960 large businesses throughout the world About

20 per cent were in North America, 30 per cent in Europe, 30 per cent in Asia-Pacific and

10 per cent in Latin America, with the remaining 10 per cent elsewhere The survey foundthat strategic planning is used by 79 per cent of the businesses This made strategic planning the single most popular management tool Strategic planning had occupied firstplace for the previous eight years and its pre-eminence was similar throughout the world

Source : Rigby, D and Bilodeau, B., The Bain 2005 Management Tool Study, Bain and Company, 2005.

Factors such as increased global competition and advances in technology, which werementioned earlier, have had a tremendous impact on the types of businesses that sur-vive and prosper, as well as the business structures and processes adopted Importantchanges that have occurred in the UK in recent years include:

l The growth of the service sector This includes businesses such as financial services,

communications, tourism, transportation, consultancy, leisure and so on This growth

of the service sector has been matched by the decline of the manufacturing sector

l The emergence of new industries This includes science-based industries such as genetic

engineering and biotechnology

l The growth of e-commerce Consumers are increasingly drawn to buying on-line a

wide range of goods including groceries, books, CDs and computers Businesses alsouse e-commerce to order supplies, monitor deliveries and distribute products

l Automated manufacturing Many manufacturing processes are now fully automated

and computers are used to control the production process

l Lean manufacturing This involves a systematic attempt to identify and eliminate

waste in the production process through storing excess materials, excess production,delays, defects and so on

l Greater product innovation There is much greater pressure to produce new,

innova-tive products The effect has been to increase the range of products available and toshorten the life cycles of many products

The changing business landscape

THE CHANGING BUSINESS LANDSCAPE 11

The strategic management framework

Figure 1.3

To position itself in a way that plays to its strengths and avoids exposing itself to its nesses, the business should take steps to draw up and follow strategic plans By doing this it should most effectively work towards its objectives and mission.

weak-l Faster response times There is increasing pressure on businesses to develop products

more quickly, to produce products more quickly and to deliver products more quickly.These changes have presented huge challenges for the management accountant Newtechniques have been developed and existing techniques adapted to ensure that man-agement accounting retains its relevance These issues will be considered in more detail

as we progress through the book

Enhancing the owners’ wealth

Businesses are created by their owners (shareholders) with the intention of enhancingthose owners’ wealth

Real World 1.7gives an example of a statement of objectives by a major UK hold products manufacturer

house-Setting financial aims and objectives

Within a market economy there are strong competitive forces at work to ensure thatfailure to enhance shareholder wealth will not be tolerated for long Competition forthe funds provided by shareholders and competition for managers’ jobs will normallymean that shareholders’ interests will prevail If the managers do not provide theexpected increase in shareholder wealth, the shareholders have the power to replace theexisting management team with a new team that is more responsive to shareholders’needs Does this mean that the needs of other groups associated with the business(employees, customers, suppliers, the community and so on) are not really important?The answer to this question is certainly no, if the business wishes to survive and pro-sper over the longer term Satisfying the needs of other groups will normally be consistentwith increasing the wealth of the owners over the longer term Dissatisfied customerswill take their business to another supplier and this will lead to a loss of wealth for theshareholders A dissatisfied workforce, for example, may result in low productivity,strikes and so forth, which will in turn have an adverse effect on shareholders’ wealth.Similarly, a business that upsets the local community by polluting the environmentmay attract bad publicity, resulting in a loss of customers, and heavy fines

Real World 1.8provides an example of how two businesses responded to potentiallydamaging allegations

REAL WORLD 1.7

Cleaning up for the shareholders

Reckitt Benckiser Group plc makes a number of cleaning and household products ing Vanish, Dettol, Air Wick and Nurofen In its 2007 annual report the business stated itsprimary objective as follows:

includ-Reckitt Benckiser’s vision is to deliver better consumer solutions in household cleaning and health and personal care for the ultimate purpose of creating shareholder value.

Source: Reckitt and Benckiser Group plc Annual Report 2007.

It is important to recognise that generating wealth for the owners is not the same asseeking to maximise the current year’s profit Wealth creation is a longer-term concept,which relates not only to this year’s profit but to that of future years as well In theshort term, corners can be cut and risks taken that improve current profit at theexpense of future profit.

Real World 1.9provides an example of a well-known retailer that suffered from notpaying sufficient attention to these other groups It also raises questions about busi-nesses in other industries

SETTING FINANCIAL AIMS AND OBJECTIVES 13

REAL WORLD 1.8

The price of clothes

US clothing and sportswear manufacturers Gap and Nike have much of their clothes produced in Asia where labour tends to be cheap However, some of the contractors that produce clothes on behalf of the two companies have been accused of unacceptable practices.

Campaigners visited the factories and came up with damaging allegations The factories were employing minors, they said, and managers were harassing female employees Nike and Gap reacted by allowing independent inspectors into the factories They promised to ensure their con- tractors obeyed minimum standards of employment Earlier this year, Nike took the extraordinary step of publishing the names and addresses of all its contractors’ factories on the internet The company said it could not be sure all the abuse had stopped It said that if campaigners visited its contractors’ factories and found examples of continued malpractice, it would take action.

Nike and Gap said the approach made business sense They needed society’s approval if they were to prosper Nike said it was concerned about the reaction of potential US recruits to the cam- paigners’ allegations They would not want to work for a company that was constantly in the news because of the allegedly cruel treatment of those who made its products.

Source: Michael Skapinker, ‘Fair shares?’, ft.com, 11 June 2005.

FT

REAL WORLD 1.9

Short-term gains, long-term problems

In recent years, many businesses have been criticised for failing to consider the long-termimplications of their policies on the wealth of the owners John Kay argues that some busi-nesses have achieved growth and short-term increases in wealth by sacrificing theirlonger-term prosperity He points out that

The business of Marks and Spencer, the retailer, was unparalleled in reputation but mature To achieve earnings growth consistent with a glamour rating the company squeezed suppliers, gave less value for money, spent less on stores In 1998, it achieved the highest [profit] margin in sales

in the history of the business It had also compromised its position to the point where sales and profits plummeted.

Banks and insurance companies have taken staff out of branches and retrained those that remain as sales people The pharmaceuticals industry has taken advantage of mergers to consoli- date its research and development facilities Energy companies have cut back on exploration.

We know that these actions increased corporate earnings We do not know what effect they have on the long-run strength of the business – and this is the key point – do the companies them- selves know? Some rationalisations will genuinely lead to more productive businesses Other com- panies will suffer the fate of Marks and Spencer.

Source: John Kay, ‘Profit without honour’, Financial Times Weekend, 29/30 June 2002.

FT

Though enhancing the wealth of the owners may not be a perfect description ofwhat businesses seek to achieve, it is certainly something that businesses cannot ignorefor the reasons mentioned For the remainder of this book enhancement/maximisation

of shareholders’ (owners’) wealth is treated as the key financial objective against whichdecisions will be assessed There will usually be other non-financial/non-economic factors that will also tend to bear on decisions The final decision may well involvesome compromise

Balancing risk and return

All decision making involves the future We can only make decisions about the future;

no matter how much we may regret it, we cannot alter the past Business decision ing is no exception to this general rule There is only one thing certain about thefuture, which is that we cannot be sure what is going to happen Sometimes we may

mak-be able to predict with confidence that what actually occurs will mak-be one of a limitedrange of possibilities We may even feel able to ascribe statistical probabilities to thelikelihood of occurrence of each possible outcome, but we can never be completely cer-tain of the future Risk is therefore an important factor in all financial decision mak-ing, and one that must be considered explicitly in all cases

As in other aspects of life, risk and return tend to be related Evidence shows thatreturns relate to risk in something like the way shown in Figure 1.4

This relationship between risk and return has important implications for settingfinancial objectives for a business The owners (shareholders) will require a minimumreturn to induce them to invest at all, but will require an additional return to com-pensate for taking risks; the higher the risk, the higher the required return Managersmust be aware of this and must strike the appropriate balance between risk and returnwhen setting objectives and pursuing particular courses of action

Real World 1.10 describes how some businesses have been making higher-riskinvestments in pursuit of higher returns

Relationship between risk and return

Figure 1.4

Even at zero risk a certain level of return will be required This will increase as the level of risk increases.

Having considered what businesses are and how they are organised and managed,

we can now turn our attention to the role of management accounting A useful ing point for our discussion is to acknowledge the general role of accounting, which is

start-to help people make informed business decisions All forms of accounting, includingmanagement accounting, are concerned with collecting and analysing financial infor-mation and then communicating this information to those making decisions Thisdecision-making perspective of accounting provides the theme for the book and shapesthe way that we deal with each topic

For accounting information to be useful for decision making, the accountant must

be clear about for whom the information is being prepared and for what purpose it will

be used In practice there are various groups of people (known as ‘user groups’) with

an interest in a particular organisation, in the sense of needing to make decisions about that organisation For the typical private sector business, the most important ofthese groups are shown in Figure 1.5 Each of these groups will have different needs foraccounting information

This book is concerned with providing accounting information for only one of thegroups identified – the managers This, however, is a particularly important user group.Managers are responsible for running the business, and their decisions and actions play

an important role in determining its success Planning for the future and exercisingday-to-day control over a business involves a wide range of decisions being made Forexample, managers may need information to help them decide whether to:

l develop new products or services (as with a computer manufacturer developing anew range of computers);

l increase or decrease the price or quantity of existing products or services (as with atelecommunications business changing its mobile phone call and text charges);

What is management accounting?

WHAT IS MANAGEMENT ACCOUNTING? 15

REAL WORLD 1.10

Appetite for risk drives businesses

Over the last few years, companies from the US and western Europe, joined increasingly

by competitors from China and India, have looked to new markets abroad both to sourceand sell their products

Driven by intensifying competition at home, companies have been drawn into directinvestment in markets that not long ago were considered beyond the pale But in the drive

to increase returns, they have also been forced to accept higher risks

Over time, the balance between risk and reward changes For example, companiesflooded into Russia early in the decade But recently returns have fallen, largely due tobooming raw materials prices Meanwhile the apparent risk of investing in Russia hasgrown significantly

As the risk–reward calculation has changed in Russia, companies have looked to othercountries such as Libya and Vietnam where the rewards may be substantial, and thethreats, though high, may be more manageable

Source: Adapted from Stephen Fidler, ‘Appetite for risk drives industry’, ft.com, 27 June 2007.

FT

‘

l borrow money to help finance the business (as with a supermarket wishing toincrease the number of stores it owns);

l increase or decrease the operating capacity of the business (as with a beef farmingbusiness reviewing the size of its herd);

l change the methods of purchasing, production or distribution (as with a clothesretailer switching from UK to overseas suppliers)

As management decisions are broad in scope, the accounting information provided

to managers must also be wide-ranging Accounting information should help in tifying and assessing the financial consequences of decisions such as those listed above

iden-In later chapters, we shall consider each of the types of decisions in the list and see howtheir financial consequences can be assessed

There are arguments and convincing evidence that management accounting tion is regarded by managers as being useful to them There have been numerous researchsurveys that have asked managers to rank the importance of management accountinginformation, in relation to other sources of information, for decision-making purposes.Generally speaking, these studies have found that managers rank accounting informationvery highly Broadly, there is no legal compulsion for businesses to produce management

informa-How useful is management accounting

busi-accounting information, yet virtually all businesses do so Presumably, the cost of producing this information is justified on the grounds that managers believe it to beuseful to them Such arguments and evidence, however, leave unanswered the ques-tion as to whether the information produced actually is being used for decision-making purposes: that is, does the information affect managers’ behaviour?

It is impossible to measure just how useful management accounting information is

to managers We should remember that it will usually represent only one input to aparticular decision, and the precise weight attached to that information by the man-ager and the benefits which flow as a result cannot be accurately assessed We shall seebelow, however, that it is at least possible to identify the kinds of qualities thataccounting information must possess in order to be useful Where these qualities arelacking, the usefulness of the information will be diminished

One way of viewing management accounting is as a form of service Management countants provide economic information to their ‘clients’, the managers The quality ofthe service provided would be determined by the extent to which the managers’ infor-mation needs have been met It is generally accepted that, to be useful, managementaccounting information should possess certain key qualities, or characteristics These are:

ac-l Relevance Management accounting information must have the ability to influencedecisions Unless this characteristic is present, there is really no point in producingthe information This means that the information should be targeted at the require-ments of the individual manager for whom it is being provided Reports that aregeneral in nature are likely to be unhelpful to most managers To be able toinfluence a decision, the information must be available when the decision needs to

be made To be relevant, therefore, information must be timely

l Reliability Management accounting should be free from significant errors or bias Itshould be capable of being relied upon by managers to represent what it is supposed

to represent Though both relevance and reliability are very important, the problemthat we often face in accounting is that information that is highly relevant may not

be very reliable, and that which is reliable may not be very relevant

What information would be relevant to the manager when deciding whether to accept the bid? How reliable would that information be?

The manager would probably like to know the current market value of the machine beforedeciding whether or not to accept the bid The current market value would be highly rel-evant to the final decision, but it might not be very reliable because the machine is uniqueand there is likely to be little information concerning market values

Where a choice has to be made between providing information that has either more evance or more reliability, the maximisation of relevance tends to be the guiding rule

rel-Activity 1.3

l Comparability This quality will enable managers to identify changes in the businessover time (for example, the trend in sales revenue over the past five years) It willalso help them to evaluate the performance of the business in relation to other sim-ilar businesses Comparability is achieved by treating items that are basically thesame in the same manner for management accounting purposes Comparabilitytends also to be enhanced by making clear the policies that have been adopted inmeasuring and presenting the information.

l Understandability Management accounting reports should be expressed as clearly

as possible and should be understood by those managers at whom the information

in addition to possessing the characteristics mentioned above, management ing information must also achieve a threshold of materiality If the information is notregarded as material, it should not be included within the reports as it will merely clut-ter them up and, perhaps, interfere with the managers’ ability to interpret the finan-cial results The type of information and amounts involved will normally determinewhether it is material

account-Having read the previous sections you may feel that, when considering a piece of management accounting information, provided the four main qualities identified arepresent and it is material it should be gathered and made available to managers.Unfortunately, there is one more hurdle to jump Something may still exclude a piece

of management accounting information from the reports even when it is considered

to be useful Consider Activity 1.4

Weighing up the costs and benefits

particu-Can you think of a reason why, in practice, you might choose not to produce the information?

The reason that you may decide not to produce, or discover, the information is that youjudge the cost of doing so to be greater than the potential benefit of having the infor-mation This cost–benefit issue will limit the extent to which management accounting information is provided

Activity 1.4

In theory, a particular item of management accounting information should only beproduced if the costs of providing it are less than the benefits, or value, to be derivedfrom its use Figure 1.6 shows the relationship between the costs and value of provid-ing additional management accounting information.

The figure shows how the total value of information received by the decision makereventually begins to decline This is, perhaps, because additional information becomesless relevant, or because of the problems that a decision maker may have in processingthe sheer quantity of information provided The total cost of providing the informa-tion, however, will increase with each additional piece of information The broken lineindicates the point at which the gap between the value of information and the cost ofproviding that information is at its greatest This represents the optimal amount ofinformation that can be provided Beyond this optimal level, each additional piece

of information will cost more than the value of having it This theoretical model, however, poses a number of problems in practice, as discussed below

To illustrate the practical problems of establishing the value of information, supposethat we wish to have a car repaired at a local garage We know that the nearest garagewould charge £250 but believe that other local garages may offer the same service for

a lower price The only ways of finding out the prices at other garages are either to phone or visit them Both, however, cost money and may involve some of our time

tele-Is it worth the cost of finding out the price of the car repair at the various local garages?The answer, as we have seen, is that if the cost of discovering the price is less than thepotential benefit, it is worth having that information

To identify the various prices for the car repair, there are various points to be sidered, including:

con-l How many garages shall we telephone or visit?

l What is the cost of each telephone call or visit?

WEIGHING UP THE COSTS AND BENEFITS 19

Relationship between cost and the value of providing additional management accounting information

Figure 1.6

The benefits of management accounting information eventually decline The cost of providing information, however, will rise with each additional piece of information The optimal level of information provision is where the gap between the value of the information and the cost of pro- viding it is at its greatest.

l How long will it take to make all the telephone calls or visits?

l How much do we value our time?

The economic benefit of having the information on the price of the car repair isprobably even harder to assess, and the following points need to be considered:

l What is the cheapest price that we might be quoted for the car repair?

l How likely is it that we shall be quoted prices cheaper than £250?

As we can imagine, the answers to these questions may be far from clear

Of course, were we to contact all of the garages and find out all of the prices, weshould know whether the exercise had been cost-effective Unfortunately we cannotknow this for certain in advance We need to make a judgement

When assessing the value of accounting information we are confronted with similarproblems

The provision of management accounting information can be very costly; however,the costs are often difficult to quantify The direct, out-of-pocket costs such as salaries

of accounting staff are not really a problem to put a price on, but these are only part

of the total costs involved There are also less direct costs such as the costs of the ager’s time spent on analysing and interpreting the information contained in reports

man-The characteristics that influence the usefulness of management accounting information

Figure 1.7

There are four main qualitative characteristics that influence the usefulness of management accounting information In addition, however, management accounting information should be material and the benefits of providing the information should outweigh the costs.

The economic benefit of having management accounting information is evenharder to assess It is possible to apply some ‘science’ to the problem of weighing thecosts and benefits, but a lot of subjective judgement is likely to be involved Whilst noone would seriously advocate that the typical business should produce no manage-ment accounting information, at the same time, no one would advocate that everyitem of information that could be seen as possessing one or more of the key charac-teristics should be produced, irrespective of the cost of producing it.

The characteristics that influence the usefulness of management accounting mation and which have been discussed in this section and the preceding section areset out in Figure 1.7

infor-Management accounting is a part of the business’s total information system Managershave to make decisions concerning the allocation of scarce economic resources To try

to ensure that these resources are allocated in an efficient manner, managers requireeconomic information on which to base their decisions It is the role of the manage-ment accounting system to provide that information and this will involve informationgathering and communication

The management accounting information systemhas certain features that are mon to all information systems within a business These are:

com-l identifying and capturing relevant information (in this case economic information);

l recording the information collected in a systematic manner;

l analysing and interpreting the information collected;

l reporting the information in a manner that suits the needs of individual managers.The relationship between these features is set out in Figure 1.8

Management accounting as an information system

MANAGEMENT ACCOUNTING AS AN INFORMATION SYSTEM 21

Given the decision-making emphasis of this book, we shall be concerned primarilywith the final two elements of the process – the analysis and reporting of manage-ment accounting information We shall consider the way in which information is used by, and is useful to, managers rather than the way in which it is identified andrecorded

Though management accounting has always been concerned with helping managers

to manage, the information provided has undergone profound changes over the years.This has been in response to changes in both the business environment and in busi-ness methods The development of management accounting is generally accepted tohave had four distinct phases

Phase 1

Until 1950, or thereabouts, businesses enjoyed a fairly benign economic environment.Competition was weak and, as products could easily be sold, there was no pressingneed for product innovation The main focus of management attention was on theinternal processes of the business In particular, there was a concern for determiningthe cost of goods and services produced and for exercising financial control over therelatively simple production processes that existed during that period In this earlyphase, management accounting information was not a major influence on decisionmaking Although cost and budget information was produced, it was not widely sup-plied to managers at all levels of seniority

Phase 2

During the 1950s and 1960s management accounting information remained inwardlyfocused; however, the emphasis shifted towards producing information for short-termplanning and control purposes Management accounting came to be seen as an import-ant part of the system of management control and of particular value in controllingthe production and other internal processes of the business The controls developed,however, were largely reactive in nature Problems were often identified as a result ofactual performance deviating from planned performance, and only then would cor-rective action be taken

Phase 3

During the 1970s and early 1980s the world experienced considerable upheaval as aresult of oil price rises and economic recession This was also a period of rapid tech-nological change and increased competition These factors conspired to produce newtechniques of production, such as robotics and computer-aided design These newtechniques led to a greater concern for controlling costs, particularly through wastereduction Waste arising from delays, defects, excess production and so on was iden-tified as a non-value-added activity – that is, an activity that increases costs, but does not generate additional revenue Various techniques were developed to reduce oreliminate waste To compete effectively, managers and employees were given greater freedom to make decisions and this in turn has led to the need for managementaccounting information to be made more widely available Advances in computing,such as the personal computer, changed the nature, amount and availability of man-agement accounting information Increasing the volume and availability of informa-tion to managers meant that greater attention had to be paid to the design ofmanagement accounting information systems

increased the level of competition which, in turn, led to a further shift in emphasis.Increased competition provoked a concern for the more effective use of resources, withparticular emphasis on creating value for shareholders by understanding customerneeds (see reference 2 at the end of the chapter) This change resulted in managementaccounting information becoming more outwardly focused The attitudes andbehaviour of customers have become the object of much information gathering.Increasingly, successful businesses are those that are able to secure and maintain com-petitive advantage over their rivals through a greater understanding of customer needs.Thus, information that provides details of customers and the market has becomevitally important Such information might include customers’ evaluation of servicesprovided (perhaps through the use of opinion surveys) and data on the share of themarket enjoyed by the particular business.

We have seen that management accounting can be regarded as a form of service wheremanagers are the ‘clients’ This raises the question, however, as to what kind of infor-mation these ‘clients’ require It is possible to identify four broad areas of decision mak-ing where management accounting information is required

l Developing objectives and plans Managers are responsible for establishing the

mission and objectives of the business and then developing strategies and plans toachieve these objectives Management accounting information can help in gather-ing information that will be useful in developing appropriate objectives and strat-egies It can also generate financial plans that set out the likely outcomes fromadopting particular strategies Managers can then use these financial plans to evalu-ate each strategy and use this as a basis for deciding between the various strategies

on offer

l Performance evaluation and control Management accounting information can help in

reviewing the performance of the business against agreed criteria We shall see belowthat non-financial indicators are increasingly used to evaluate performance, alongwith financial indicators Controls need to be in place to ensure that actual perform-ance conforms to planned performance Actual outcomes will, therefore, be com-pared with plans to see whether the performance is better or worse than expected.Where there is a significant difference, some investigation should be carried out andcorrective action taken where necessary

l Allocating resources Resources available to a business are limited and it is the

respons-ibility of managers to try to ensure that they are used in an efficient and effectivemanner Decisions concerning such matters as the optimum level of output, theoptimum mix of products and the appropriate type of investment in new equipmentwill all require management accounting information

l Determining costs and benefits Many management decisions require knowledge of

the costs and benefits of pursuing a particular course of action such as providing aservice, producing a new product or closing down a department The decision willinvolve weighing the costs against the benefits The management accountant canhelp managers by providing details of particular costs and benefits In some cases,costs and benefits may be extremely difficult to quantify; however, some approx-imation is usually better than nothing at all

These areas of management decision making are set out in Figure 1.9

What information do managers need?

WHAT INFORMATION DO MANAGERS NEED? 23

Adopting a more strategic and customer-focused approach to running a business hashighlighted the fact that many factors, which are often critical to success, cannot bemeasured in purely financial terms Many businesses now seek to develop key per- formance indicators (KPIs) These include the traditional financial measures, such asreturn on capital employed KPIs now, however, usually include a significant propor-tion of non-financial indicators to help assess the prospects of long-term success Toaid decision making, the management accountant has increasingly shouldered respons-ibility for reporting non-financial measures regarding quality, product innovation,product cycle times, delivery times and so on.

Reporting non-financial information

It can be argued that non-financial measures, such as those mentioned above, do not, strictly speaking, fall within the scope of accounting information and, therefore, could (or should) be provided by others What do you think?

It is true that others could collect this kind of information However, management ants are major information providers to managers and usually see it as their role to pro-vide a broad range of information for decision making The boundaries of accounting arenot fixed and it is possible to argue that management accountants should collect this kind

account-of information as it is account-often linked inextricably to financial outcomes

Activity 1.5